MobileSmith (MOSTQ) 8-K/A Financial Statements and Exhibits

EXHIBIT 99.2

Independent Accountants’ Report

Board of Directors and Stockholders

Computility, Inc.

Des Moines, Iowa

We have audited the accompanying balance sheets of Computility, Inc. as of December 31, 2004 and 2003 and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the three year period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Computility, Inc. at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO Seidman, LLP

Charlotte, North Carolina

September 9, 2005 (except for Note 12, for which the date is October 4, 2005)

COMPUTILITY, INC.

 Balance Sheets

		June 30, 2005		December 31, 2004		December 31, 2003
		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	54,250	$	-	$	107,296
Accounts receivable, net		23,657		24,579		5,177
Due from related parties		27,693		24,990		39,633
Advances due from finance company		71,757		-		-
Total current assets		177,357		49,569		152,106
Property and equipment, net		386,817		445,988		516,222
Deferred financing costs		269,311		296,397		326,689
Other assets		1,932		1,932		1,932
Total assets	$	835,417	$	793,886	$	996,949

See accompanying summary of significant accounting policies and notes to financial statements.

2

Computility, Inc.

Balance Sheets

		June 30, 2005			December 31, 2004			December 31, 2003
		(unaudited)
Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable	$	147,445		$	126,457		$	65,273
Accrued expenses		79,366			81,638			36,955
Subscription financing payable		907,625			974,109			1,037,728
Capital leases payable		9,329			10,337			11,220
Note payable		70,000			20,000			-
Due to related parties		-			5,314			21,044
Other current liabilities		-			-			1,425
Total current liabilities		1,213,765			1,217,855			1,173,645
Long-term liabilities:
Capital leases payable, less current portion		9,798			14,707			25,044
Subscription financing payable, less current portion		916,140			975,444			1,004,695
Note payable, less current portion		130,000			30,000			-
Due to related parties, less current portion		-			-			5,276
Customer deposits		6,204			6,582			32,664
Total long-term liabilities		1,062,142			1,026,733			1,067,679
Total liabilities		2,275,907			2,244,588			2,241,324
Commitments and contingencies
Stockholders’ deficit:
Common stock $.001 par value, 20,000,000 shares authorized; outstanding:  June 30, 2005 and December 31, 2004 - 12,635,555; December 31, 2003 - 11,300,000		12,636			12,636			11,300
Additional paid-in-capital		448,230			439,031			201,200
Accumulated deficit		(1,901,356	)		(1,902,369	)		(1,456,875	)
Total stockholders’ deficit		(1,440,490	)		(1,450,702	)		(1,244,375	)
Total liabilities and stockholders’ deficit	$	835,417		$	793,886		$	996,949

See accompanying summary of significant accounting policies and notes to financial statements.

3

Computility, Inc.

Statements of Operations

	Six Months Ended						Year Ended
	June 30, 2005			June 30, 2004			December 31, 2004			December 31, 2003			December 31, 2002
	(unaudited)			(unaudited)
Revenues:
Products sold	$	110,191		$	16,916		$	165,750		$	51,318		$	22,717
Consulting sales		42,324			33,314			99,400			68,235			21,041
Subscriptions revenue		881,507			852,470			1,720,864			1,332,686			918,951
Other revenue		-			-			508			-			5,010
Total revenue		1,034,022			902,700			1,986,522			1,452,239			967,719
Cost of revenues:
Products Sold		52,678			9,424			133,146			35,076			18,866
Consulting		14,194			15,387			38,902			29,120			9,450
Subscriptions		332,589			401,554			738,556			590,639			425,183
Total cost of revenues		399,461			426,365			910,604			654,835			453,499
Gross profit		634,561			476,335			1,075,917			797,404			514,220
Operating expenses:
Sales and marketing		252,782			235,946			547,526			324,229			243,826
Research and development		115,649			136,319			282,359			183,779			135,897
General and administrative		160,422			282,379			483,893			443,392			358,274
Loss on disposal of assets		-			-			14,181			-			-
Total operating expenses		528,853			654,644			1,327,959			951,400			737,997
Income (loss) from operations		105,708			(178,309	)		(252,042	)		(153,996	)		(223,777	)
Other income (expense):
Other income		(153	)		-			12			10,821			3,505
Interest expense		(104,542	)		(122,998	)		(193,464	)		(181,242	)		(104,765	)
Total other income (expense)		(104,695	)		(122,998	)		(193,452	)		(170,421	)		(101,260	)
Net income (loss)	$	1,013		$	(301,307	)	$	(455,494	)	$	(342,417	)	$	(325,037	)

See accompanying summary of significant accounting policies and notes to financial statements.

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Computility, Inc.

Statements of Stockholders’ Deficit

For the Six Months Ended June 30, 2005 (unaudited) and the Years Ended December 31, 2004, 2003 and 2002

	Common Shares	Common Stock $.001 Par		Additional Paid In Capital		Accumulated Deficit			Total
Balance, January 1, 2002	10,488,889	$	10,489	$	89,511	$	(807,421	)	$	(707,421	)
Issuance of stock for services	100,000		100		12,400		-			12,500
Net loss	-		-		-		(325,037	)		(325,037	)
Balance, December 31, 2002	10,588,889		10,589		101,911		(1,132,458	)		(1,019,958	)
Issuance of stock for cash	520,000		520		64,480		-			65,000
Debt conversion to equity	80,000		80		9,920		-			10,000
Issuance of stock for services	111,111		111		24,889		-			25,000
Net loss	-		-		-		(324,417	)		(324,417	)
Balance, December 31, 2003	11,300,000		11,300		201,200		(1,456,875	)		(1,244,375	)
Issuance of stock for cash	866,666		867		174,133		-			175,000
Issuance of stock for services	468,889		469		63,698		-			64,167
Net loss	-		-		-		(445,494	)		(445,494	)
Balance, December 31, 2004	12,635,555	$	12,636	$	439,031	$	(1,902,369	)	$	(1,450,702	)
Issuance of warrants for services (unaudited)	-		-		9,199		-			9,199
Net income (unaudited)	-		-		-		1,013			1,013
Balance, June 30, 2005 (unaudited)	12,635,555	$	12,636	$	448,230	$	(1,901,356	)	$	(1,440,490	)

See accompanying summary of significant accounting policies and notes to financial statements.

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Computility, Inc.

Statements of Cash Flows

	Six Months Ended						Year Ended
	June 30, 2005			June 30, 2004			December 31, 2004			December 31, 2003			December 31, 2002
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income (loss)	$	1,013		$	(301,307	)	$	(445,494	)	$	(324,417	)	$	(325,037	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		150,350			173,739			330,665			254,914			152,966
Loss on disposal of property and equipment		-			-			14,181			-			-
Amortization of deferred financing costs		99,036			116,029			183,032			156,341			100,430
Equity issued for services		9,199			12,500			64,167			25,000			12,500
Changes in assets and liabilities:
Accounts receivable		922			(23,131	)		(19,402	)		(3,079	)		13,479
Other current assets		-			-			-			1,718			-
Accounts payable		20,988			65,279			61,184			(113,985	)		91,266
Accrued expenses		(2,272	)		30,000			44,683			10,869			5,315
Other current liabilities		-			-			(1,425	)		1,425			(12,588	)
Customer deposits		(378	)		(25,704	)		(26,082	)		(756	)		5,982
Net cash provided by operating activities		278,858			47,405			205,509			8,030			44,313
Cash flows from investing activities:
Purchase of property and equipment		(162,946	)		(148,079	)		(276,612	)		(358,660	)		(309,239	)
Proceeds from disposal of property and equipment		-			-			2,000			-			-
Net cash used in investing activities		(162,946	)		(148,079	)		(274,612	)		(358,660	)		(309,239	)

See accompanying summary of significant accounting policies and notes to financial statements.

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Computility, Inc.

Statements of Cash Flows

	Six Months Ended						Year Ended
	June 30, 2005			June 30, 2004			December 31, 2004			December 31, 2003			December 31, 2002
	(unaudited)			(unaudited)
Cash flows from financing activities:
Borrowings from contract factors		385,854			380,407			947,973			1,253,647			1,044,825
Repayments to contract factors		(583,592	)		(567,476	)		(1,193,584	)		(957,910	)		(604,013	)
Borrowings on notes payable		150,000			89,633			50,000			-			-
Repayments on notes payable		(8,007	)		(11,699	)		(6,362	)		(5,492	)		(117,821	)
Borrowings on capital leases		-			-			-			34,523			10,207
Payments on capital leases		(5,917	)		(5,373	)		(11,220	)		(13,075	)		(21,104	)
Stock issued in exchange for note payable		-						-			10,000			-
Issuance of common stock		-			150,000			175,000			65,000			-
Net cash (used in) provided by financing activities		(61,662	)		35,492			(38,193	)		386,693			312,094
Net (decrease) increase in cash and cash equivalents		54,250			(65,182	)		(107,296	)		36,063			47,168
Cash and cash equivalents, beginning of period		-			107,296			107,296			71,233			24,065
Cash and cash equivalents, end of period	$	54,250		$	42,114		$	-		$	107,296		$	71,233
Supplemental disclosures:
Cash payments during the period for interest	$	5,479		$	6,611		$	10,432		$	24,902		$	4,339
Issuance of stock for services		9,199			12,500			64,167			25,000			12,500
Debt converted to equity		-			-			-			10,000			-

See accompanying summary of significant accounting policies and notes to financial statements.

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Computility, Inc.

Summary of Significant Accounting Policies

Nature of Business

Computility, Inc. (the "Company" or "Computility") was incorporated in the State of Nevada in April, 2000. Computility provides turnkey network computing services on a subscription basis to small and mid-size organizations. Computility has also developed an internet-delivered customer resource management (CRM) and sales force automation software product that it markets on a subscription basis to small and mid-size organizations.

Unaudited Interim Financial Information - The accompanying unaudited interim balance sheets as of June 30, 2005, the statements of operations and cash flows for the six months ended June 30, 2005 and 2004 and the statement of stockholders’s deficit for the six months ended June 30, 2005 are unaudited. These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of the Company’s management, the unaudited interim financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company’s statement of financial position, results of operations and its cash flows for the six months ended June 30, 2005 and 2004. The results for the six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the year ending December 31, 2005.

Revenue Recognition

We recognize revenue in accordance with accounting standards for software and service companies including United States Securities Exchange Commission (“SEC”), Staff Accounting Bulletin No. 104 “Revenue Recognition” (“SAB 104”), the Emerging Issues Task Force Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”),and related interpretations including American Institute of Certified Public Accountants (“AICPA”) Technical Practice Aids. We also utilize interpretative guidance from regulatory and accounting bodies, which include, but are not limited to, the SEC, the AICPA, the Financial Accounting Standards Board (“FASB”), and various professional organizations.

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of our fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.

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Subscription revenue consists of fees for services that are charged to customers monthly, under fixed-length subscription contracts. These contracts are typically three-year contracts which provide enumerated services or access to Computility’s web-based products in exchange for a monthly subscription payment. The contract and support contracts are noncancelable, though they typically provide for early termination upon a material breach by either party that is not cured in a timely manner. Customers are generally invoiced monthly on the 1^st of the month, and the typical payment terms provide that customers pay by Automated Clearing House (ACH) withdrawal by the 15^th of each month. Revenue is recognized monthly when the customers are invoiced for their monthly subscribed services.

Consulting revenue consists of fees for services to customers that are not covered by the subscription contract. Customers are billed for these services on an hourly basis, and Computility recognizes this consulting revenue at the time the service is provided.

Product sales represent computer hardware and software that is sold to customers not under a subscription contract. Revenue is recognized at the time that the product is delivered and/or installed.

Cash and Cash Equivalents

All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.

Software Development Costs

Computility has not capitalized any direct or indirect cost associated with the development of software products prior to general release. SFAS No. 86, “Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed,” requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs related to software development incurred between completion of the working model and the point at which the product is ready for general release have been insignificant, accordingly no such cost have been capitalized.

Impairment of Long Lived Assets

Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Property and Equipment

Property and equipment are stated at cost and are depreciated over their estimated useful lives, using the straight-line method as follows:

Office equipment

5 years

Computer hardware and software

3 years

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As part of the subscription contract with certain customers, Computility purchases and installs desktop and network computer equipment at the customer’s location. Computility maintains ownership and services the equipment for the life of the subscription contract and takes possession of the equipment at the conclusion of the subscription contract term. Subscriber Premise Equipment (“SPE”) is stated at cost and depreciated using a straight-line method over 3 years.

Subscription Contract Receivables

Monthly subscription fees that Computility is contractually entitled to receive over the remaining subscription period are netted with the corresponding liability for unearned revenue. Subscription contract receivables and the corresponding liability for unearned subscription revenue, which net to zero, were $2,794,804 (unaudited) at June 30, 2005, and $2,998,890 and $3,127,328 at December 31, 2004 and  2003, respectively.

Deferred Financing Costs

Deferred financing costs represent cost of obtaining financing and are amortized over the life of the related financing agreements.

Fair Values

The fair values of cash equivalents, accounts receivable, accounts payable, accrued liabilities, and notes payable approximate the carrying values due to the short period of time to maturity.

Advertising Costs

Computility expenses all advertising costs as they are incurred. The amount charged to expense for the six months ended June 30, 2005 and 2004 was $0 and $977, respectively.  The amount charged to expense for the years ended December 31, 2004, 2003 and 2002 was $1,168, $739 and $21,582, respectively. The year ended December 31, 2002 included $13,200 of barter advertising. Computility did not have any barter advertising for the years ended December 31, 2004 and 2003.

Stock-Based Compensation

Computility accounts for its stock-based compensation plans in accordance with the intrinsic value provisions of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Stock Options are generally granted at prices equal to or exceeding the fair value of Computility’s common stock on the grant dates (see Note 7). Accordingly, Computility did not record any compensation expense in the accompanying financial statements for its stock-based compensation plans. Had compensation expense been recognized consistent with the fair value provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” Computility’s net income (loss) for the six months ended June 30, 2005 and 2004 and for the years ended December 31, 2004, 2003 and 2002 would have been changed to the pro forma amounts indicated below.

	Six Months						Years ended
	June 30, 2005			June 30, 2004			December 31, 2004			December 31, 2003			December 31, 2002
Net income/(loss) as reported	$	1,013			(301,307	)		(451,772	)		(329,119	)		(329,739	)
ADD: Compensation cost recorded at intrinsic value		-			0			-			-			-
LESS: Compensation cost using the fair value method		(1,577	)		(9,800	)		(18,975	)		(16,503	)		(6,503	)
Pro forma	$	564		$	(311,107	)	$	(470,747	)	$	(345,633	)	$	(346,242	)

10

The fair value of option grants under Computility’s plan and other stock option issuance during the years ended December 31, 2004, 2003 and 2002 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Six Months Ended				Years Ended
	June 30, 2005		June 30, 2004		December 31, 2004		December 31, 2003		December 31, 2002
Dividend yield	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%
Expected volatility	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%
Risk free interest rate	4.23	%	4.31	%	4.23	%	4.02	%	4.61	%
Expected lives (years)	6.7	%	7.5	%	7.1		7.6		8.4

Management Estimates

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and income and expense for the period then ended. Certain estimates made by Computility pertain to allowance for doubtful accounts, returns, and litigation reserves. Actual results could differ from those estimates.

Income Taxes

Computility accounts for income taxes under the asset and liability method in accordance with the requirements of Statement of Financial Accounting Standard No. 109 (“FAS 109”) . Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.

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Computility, Inc.

Notes to Financial Statements

The accompanying footnotes include amounts as of June 30, 2005 and for the six months ended June 30, 2005 and 2004 which are unaudited.

1.         Receivables

Computility evaluates the need for an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, management has determined that no provision for uncollectible accounts was required at June 30, 2005, December 31, 2004 and 2003.

2.         Property and Equipment

Property and equipment consists of the following at:

	June 30, 2005			December 31, 2004			December 31, 2003
Computer equipment	$	1,151,859		$	1,133,140		$	918,606
Office furniture and Equipment		80,137			80,137			68,541
		1,231,996			1,213,277			987,147
Less accumulated Depreciation		(845,179	)		(767,289	)		(470,925	)
Property and equipment, net	$	386,817		$	445,988		$	516,222

Depreciation for the six months ended June 30, 2005 and 2004 was $144,636 and $171,388, respectively.  Depreciation expense for the years ended December 31, 2004, 2003 and 2002, was $332,241 and $254,914, respectively.

3.         Capital Leases

Computility leases various computer equipment under various capital leases, with initial terms between 36 and 48 months. All the leases contain a provision to buy the equipment at the end of the lease term for $1.

Capitalized cost and accumulated amortization for the equipment is as follows:

		June 30, 2005		December 31, 2004			December 31, 2003
Subscriber premise Equipment	$	44,729		$	44,729		$	44,729
Less accumulated Depreciation		(39,139	)		(31,983	)		(17,671	)
	$	5,590		$	12,746		$	27,058

At December 31, 2004, the future minimum lease payments under Computility’s capital lease obligation are as follows:

2005	$	13,431
2006		11,592
2007		4,830
		29,853
Less amount representing interest		(4,809	)
Present value of minimum lease payments	$	25,044

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4.          Financing

Subscription Financing Payable

Computility borrows money to provide working capital for operations and purchases of subscriber equipment by factoring a majority of new subscription contracts with various financing companies. Computility assigns a percentage of the future subscription cash flows on the contract, generally 70%, to the financing companies and receives an advance on the discounted present value of the assigned cash flows. The lender takes an assignment of the contract and the subscriber equipment until the loan is paid.

The interest rate on the financed contracts range from 9.00% to 13.75%. As of December 31, 2004, the discount rates on new contract financing was 9.0% to 10.25%.

The following summarizes the outstanding balances due to the funding companies at:

		June 30, 2005		December 31, 2004		December 31, 2003
Finance company A	$	1,440,838	$	1,524,119	$	1,478,431
Finance company B		382,927		425,434		563,992
		1,823,765		1,949,553		2,042,423
Less current portion		907,625		974,109		1,037,728
Total long term subscription financing payable	$	916,140	$	975,444	$	1,004,695

The aggregate annual maturities of subscription financing are as follows:

2005	$	974,109
2006		907,138
2007		68,306
	$	1,949,553

Notes Payable

In February 2004, Computility entered into a non-interest bearing agreement with the Iowa Department of Economic Development (“IDED”) and received a $50,000 financial assistance investment to be repaid beginning June 1, 2005 on a semi-annual basis. Repayments to IDED are based on a percentage of prior year gross revenues. Such agreement is shown on the accompanying balance sheets as a note payable.  The balance under this agreement at June 30, 2005 and December 31, 2004 was $50,000 and $50,000, respectively.

During 2004, Computility borrowed $25,000 from a director. The loan was repaid within 30 days.

During 2003, Computility borrowed $35,000 from an employee of Growth Ventures Group. The note was payable in equal installments of $1,818 with an interest rate of 20.0%. As of December 31, 2004 the balance was $3,547.

In February 2005, Computility entered into a Floor Plan Agreement with finance company A that provided additional debt financing of $150,000 for working capital. The debt is secured by subscription revenues and is required to be repaid in 12 equal monthly installments beginning in March 2006. Interest is at the corporate prime rate.

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Over the course of 2003 and 2004 Computility had various loans from employees, advisors and other related parties. None of these loans were outstanding as of December 31, 2004.  The balance at June 30, 2005 was $2,693.

For additional loans from related parties see Note 9, Related Party Transactions.

5.         Operating Leases

Computility leases its facility from its majority stockholder, Growth Ventures Group, under an operating lease agreement which expired in April 2005. Computility is currently operating on a month to month basis with its building lease.  Computility also leases office equipment under a lease that expires in December 2006. Through June 2004, Computility paid Growth Ventures Group a rental charge for the use of various office furniture and equipment. Total rent expense for the six months ended June 30, 2005 and 2004 was $31,353 and $22,374, respectively. Total rent expense for the years ended December 31, 2004, 2003 and 2002 was $46,371, $52,504 and $42,478, respectively.  At December 31, 2004, future annual minimum operating lease payments are as follows:

2005	$	22,388
2006		2,388
	$	24,776

6.         Stockholders’ Deficit

Common Stock

Computility is authorized to issue 20,000,000 shares of common stock, $0.001 par value per share (the "Common Stock").  Computility has 12,635,555 shares of Common Stock outstanding at June 30, 2005 and December 31, 2004 and 11,300,000 shares of Common Stock outstanding at December 31, 2003.  Holders of Common Stock are entitled to one vote for each share of Common Stock held by them.

Warrants

In November 2004, Computility issued warrants to two non-shareholder board members that gave them the right to purchase up to $50,000 of the next equity or debt security issued by the Company subsequent to October 14, 2004 at a price equal to 100.10% of the issued security. The warrants have a term of five years from the date of issuance and also contain a provision that requires Computility to repurchase the warrant upon sale or change in ownership of the Company if no new debt or equity securities are issued by the Company subsequent to October 14, 2004. At December 31, 2004 no securities qualifying for purchase under the warrant had been issued by Computility. (See Note 12)

On January 1, 2005 the Company issued a warrant for the purchase of 80,000 shares of Computility common stock at $0.01 per share to an individual who provides financial and management services to the Company. Between April 1 and August 1, 2005, the Company issued warrants to this same individual for the purchase of 129,477 shares of Computility common stock at $0.15 - $0.17 per share.  The Company recorded the fair value of these warrants as compensation expense, which amounted to $9,200 for the six months ended June 30, 2005.

All the foregoing warrants contain cashless exercise provisions.

Stock Option Plans

Computility adopted the Harvest Services General Stock Option Plan (the “Plan") as of May 18, 2000. The Plan provides for the grant of incentive stock options and nonstatutory stock options to employees (including officers) and directors of Computility as well as to certain consultants and advisors. The total number of shares of our common stock reserved for issuance under the Plan is 5,000,000 shares, subject to adjustment in the event of stock split, stock dividend, recapitalization or similar change.

At December 31, 2004, options to purchase 3,644,000 shares of common stock were outstanding under the Plan.

The exercise price for incentive stock options granted under the above plans is required to be no less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. Incentive stock options typically have a maximum term of 10 years, except for option grants to 10% stockholders, which are subject to a maximum term of 5 years. Nonstatutory stock options have a term determined by the Board of Directors. Options granted under the plans are not transferable, except by will and the laws of descent and distribution.

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A summary of the status of the plan and other stock option issuances at December 31, 2004, 2003, 2002 and 2001 and changes during the periods ended on these dates is as follows:

	Shares		Weighted Average Exercise Price
Balance, December 31, 2001		2,650,000	$	0.225
Granted		15,000	$	0.225
Balance, December 31, 2002		2,665,000	$	0.225
Granted		330,000	$	0.225
Balance, December 31, 2003		2,995,000	$	0.225
Granted		649,000	$	0.225
Balance, December 31, 2004		3,644,000	$	0.225
Granted		50,000	$	0.225
Balance, June 30, 2005		3,694,000	$	0.225

The following table summarizes information about stock options outstanding at December 31, 2004:

				Currently Exercisable
Exercise Price	Number of Shares Outstanding	Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Number of Shares	Weighted Average Exercise Price
$0.225	3,644,000	7	$     0.225	2,875,000	$    0.225

The number of options exercisable at December 31, 2004, 2003 and 2002 were 2,875,000, 2,478,750 and 1,812,500, respectively. The weighted average exercise price was $0.225 at December 31, 2003, 2002 and 2001.

Dividends

Computility has not paid any cash dividends through December 31, 2004.

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7.         Income Taxes

The balances of deferred tax assets and liabilities are as follows:

		June 30, 2005			December 31, 2004			December 31, 2003
Net deferred income tax asset relate to:
Property and equipment	$	57,604		$	66,867		$	78,612
Accrued liabilities		15,464			24,841			14,782
Net operating loss carryforwards		702,080			714,444			534,666
Total		775,148			806,152			628,060
Less valuation allowance		(775,148	)		(806,152	)		(628,060	)
Net current deferred income tax	$	-		$	-		$	-

Under SFAS 109, a valuation allowance is provided when it is more likely than not that the deferred tax asset will not be realized.

For the six months ended June 30, 2005 and 2004 and for the years ended December 31, 2004, 2003 and 2002, the Company did not incur current income tax expense due to net operating losses.

At December 31, 2004, Computility had Federal Net Operating Loss (“NOL”) carryforwards of approximately $1,809,000 which expire between 2015 and 2019. In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in equity ownership of greater than 50% of Computility within a three-year period can result in an annual limitation on Computility’s liability to utilize its NOL carryforwards that were created during tax periods prior to the change in ownership.

8.         Major Customers and Concentration of Credit Risk

Financial instruments that potentially subject Computility to credit risk consist principally of trade receivables. Computility believes the concentration of credit risk in its trade receivables is substantially mitigated by Computility’s ongoing credit evaluation process, relatively short collection terms and Computility’s policy of generally requiring all customers to pay their subscription fees via ACH. Computility evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

Computility did not have any customers that individually accounted for more than 10% of total revenues for the six months ended June 30, 2005 and 2004 or for the years ended December 31, 2004, 2003 and 2002, respectively.

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9.         Related Party Transactions

Growth Ventures Group, Inc., which is majority-owned by three officers and directors of Computility, owns approximately 65% of the outstanding Common Stock of Computility at December 31, 2004. Since inception, Growth Ventures Group, Inc. has provided Computility with various management services, including roles of CEO, CTO, CFO, legal services, facilities and administration in exchange for a management services fee. In October, 2004, Computility discontinued using Growth Ventures Group, Inc. to provide the CEO and CTO roles and contracted directly with companies wholly-owned by these two officers to provide these roles. In January 2005, Computility discontinued using Growth Ventures Group, Inc. to provide all remaining management services except for facilities and occupancy costs.

During 2002, 2003 and 2004 certain internet communication, data center back up and web site development and administrative services were provided by related parties. In addition, Computility incurred interest expense on various loans from related parties.

Expenses incurred with related parties consist of the following:

		June 30, 2005		June 30, 2004	December 31, 2004		December 31, 2003		December 31, 2002
Growth Ventures Group, Inc. - management services	$	54,501	$	319,559	$	521,147	$	492,736	$	337,415
Computility stockholder - communications services		29,808		31,929		60,630		50,634		44,419
Management companies owned by two stockholders, officers and directors of Computility - CEO and CTO services		121,105		-		58,778		379		-
Computility stockholder - advertising and public relations services		-		9,327		16,919		36,274		-
Computility stockholder - contract CFO		51,238		-		-		-		-
Insurance agency owned by an immediate relative of a Computility stockholder - commercial insurance		281		283		1,037		499		337
Total expenses incurred with related parties	$	257,318	$	361,098	$	658,511	$	580,522	$	382,171

Computility provided IT services to various related parties in the normal course of business. Included in revenues are the following related party transactions for the years ended December 31:

		June 30, 2005		June 30, 2004	December 31, 2004		December 31, 2003		December 31, 2002
Affiliated entity, wholly-owned by Growth Ventures Group, Inc.	$	14,216	$	11,832	$	24,971	$	23,664	$	23,664
Growth Ventures Group, Inc.		-		-		2,123		80		-
Other related parties		1,320		1,122		3,502		3,673		2,485
Total revenues generated from sales to related parties	$	15,536	$	12,954	$	30,596	$	27,417	$	26,149

In addition, at June 30, 2005, December 31, 2004 and 2003, there were $75,803, $23,300 and $1,630, respectively, owed to related parties included in accounts payable on the accompanying balance sheets. There were $6,498 of receivables from related parties included in accounts receivable on the accompanying balance sheet at June 30, 2005 and December 31, 2004, respectively. There were no related party receivables included in accounts receivable on the accompanying balance sheet at December 31, 2003.

10.         Employee Benefit Plans

Computility leases its employees through a Professional Employment Organization (PEO). Through the PEO, all full-time employees who meet certain age and length of service requirements are eligible to participate in a 401(k) Plan. The plan provides for a 401(k) option under which eligible participants may defer a portion of their salary and contributions by Computility as a percentage of employee deferments in addition to such amounts as the Board of Directors may annually determine. Contribution expense for the six months ended June 30, 2005 and 2004 was $2,818 and $624, respectively.  Contributions expense for the years ended December 31, 2004, 2003, and 2002 were $2,046, $2,840 and $1,530, respectively.

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11.         Contingencies

Computility is subject to claims and suits that arise from time to time in the ordinary course of business, including a claim asserted by a former employee. The claim asserts that the employee was unfairly terminated, and seeks back wages and other compensation. The employees claims have previously been dismissed by State and Federal Civil Rights Commission. Computility believes that the employee’s claims are without merit and does not believe that the ultimate disposition of the claim will result in a material impact to the Company’s financial position or future results or operations.

12.         Subsequent Events

In July and August 2005, Computility raised $75,000 of additional equity by issuing 500,000 shares of Common Stock at $0.15 per share to three non-related party investors.

In August, 2005, the Company granted additional stock options under the existing Stock Options Plan to certain employees who met certain service and performance criteria. A total of 796,000 additional options were granted.

On October 4, 2005, substantially all of the assets of the Company were acquired by Smart Online, Inc. (OTCBB: SOLN), a publicly-traded developer and distributor of internet-delivered software-as-service (“SAS”) software applications and data resources to start, run, protect and grow small businesses , pursuant to an Asset Purchase Agreement dated as of October 4, 2005 by and among Smart Online, Smart CRM, Inc., Computility and certain shareholders of Computility. The acquired assets include all of the fixed assets, machinery, equipment, fixtures, leasehold improvements, furniture, intellectual property, leases, accounts receivable, factoring contracts and goodwill.

In consideration for the purchased assets, Smart Online issued the seller 484,213 shares of Smart Online Common Stock (valued at approximately $3.5 million based upon the fair market value of Smart Online's stock at the closing date since it was earlier than date of announcement) and assumed certain liabilities of Computility totaling approximately $1.9 million.  In addition two key employees of Computility can earn up to $91,800 each over and above their base compensation during the fifteen months ended December 31, 2006, if certain performance agreements which typically have 3-year terms with substantial penalties for early termination.  Until the date of the acquisition, Computility factored substantially all of its subscription agreements and received approximately 65% of the expected cashflow from the subscription period upfront and use the cash to fund on-going operations.  As a result of the factoring arrangements, Smart Online will be required to provide services to the customers, but will only receive approximately 35% of the corresponding customer payments.  Additionally, as a result of this factoring activity and based on contracts signed as of the date of acquisition, management expects that the acquisition will result in an approximate $100,000 monthly increase in cash expenditures for the remainder of 2005.

Smart Online and Smart CRM entered into employment agreements with two key employees and shareholders of Computility. One of these individuals serves as Director CRM Business Development to Smart CRM, receiving an annual salary of $90,000, $45,000 in consideration of a non-compete covenant and a bonus of up to $91,800 to be earned upon achievement of certain revenue milestones set forth in the employment agreement during the period from the date of the acquisition through March 31, 2007. One of the individuals serves as Director CRM Technology to Smart CRM, receiving an annual salary of $90,000, $45,000 in consideration of a noncompetion covenant and a bonus of up to $91,800 to be earned upon achievement of certain software development milestones set forth in the employment agreement during the period from the date of the acquisition through March 31, 2007.

In September 2005, the Company purchased a previously issued warrant to a non-shareholder board memeber (see note 6) by issuing 166,667 shares of Computility common stock.  The company recorded the fair value of this stock as compensation expense, which amounted to $25,000, in September 2005.

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